Deutsche Bank to pay $1 million fine

Deutsche Bank Securities Ltd has agreed to pay a fine of $1 million in connection with its role in the collapse of the asset-backed commercial paper market in July, 2007.

The Investment Industry Regulator of Canada released details of the settlement deal on Friday.

Deutsche Bank agreed that it received an email in July 2007 that included details about exposure to U.S. subprime mortgages in the Canadian ABCP market, and that it did not disclose that information to clients. Nor did it immediately forward the email to its compliance department, according to the IIROC documents.

“We are pleased to have settled this matter,” Duncan King, a spokesperson for Deutsche Bank said.

Asset-backed commercial paper, known as ABCP, is a short-term debt instrument with a typical maturity of 30 to 180 days. The $32 billion Canadian ABCP market ground to a halt in August 2007 when investors worried that some of the investments were backed by shaky U.S. subprime mortgages.

Coventree Inc., then Canada’s biggest seller of non-bank ABCP, held an investor presentation in late April, 2007, where it disclosed that the overall U.S. subprime exposure in its conduits was 7.4 per cent, according to the settlement deal.

The firm sent an email to all members of its syndicate, including Deutsche Bank, on July 24, 2007, showing the levels of subprime assets in various trusts. It showed that subprime accounted for 26 per cent of the assets in Planet Trust Series A.

The same email said that “all deals remained at AAA level” and “were performing as expected” with “minimal loss levels,” according to the IIROC documents.

Deutsche Bank took the position that it was Coventree’s responsibility to distribute the information to investors. Coventree also told Deutsche Bank it was in the process of rebalancing its subprime assets, the documents say.

Deutsche Bank’s position is that it did not disclose the information because the information was outdated, not publicly verifiable and presented as good news as opposed to bad news, according to the documents.

Deutsche Bank circulated the email to the credit and market risk division of its parent company, which did not voice any concerns about the Coventree ABCP, the documents say.

Its compliance department was not made aware of the email until after Aug. 13, 2007, IIROC said. That’s when the ABCP market froze.

Between July 25 and Aug. 2, 2007, Deutsche Bank sold $25.8 million of Planet A Trust ABCP to a large institutional investor, according to the documents. Deutsche Bank advised the client there was some subprime exposure in the notes, but did not provide details.

In early August, Deutsche Bank sold $54.1 million of ABCP to a large international bank and a large Canadian financial institution, and $1.3 million to a large financial institution. Though liquidity and subprime issues were discussed in a general way, the details of the July 24 email were not disclosed, IIROC said.

“The Respondent did not ensure all its clients who had invested or were interested in investing in Coventree-sponsored ABCP knew of the detailed information contained in the July 24th email,” IIROC said.

“The Respondent did not engage the appropriate involvement of Compliance in matters related to the worsening conditions of the third-party ABCP market and the potential for a market disruption,” IIROC said.

Coventree and its two founders were ordered to pay about $2.25 million in penalties. The company wound up its operations last year.

In late 2009, several of Canada’s biggest financial institutions paid nearly $139 million in penalties to settle allegations of wrong-doing for their roles in the ABCP.

National Bank agreed to pay $75 million, the single largest amount, followed by Scotia Capital and CIBC World Markets which paid nearly $29.3 million and $21.7 million in fines, respectively.

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